Surface Transportation Board Discusses Rail Costs

Dec. 7, 2007
Reporting on a meeting conducted by the Surface Transportation Board (STB) analysts from Stifel Nicolaus said the STB's willingness to consider replacement

Reporting on a meeting conducted by the Surface Transportation Board (STB) analysts from Stifel Nicolaus said the STB's willingness to consider replacement values in the method used to calculate the railroads' return on invested capital was very positive news. The STB compares the return on invested capital (ROIC) to the cost of capital to determine whether railroads are revenue adequate, explains John G. Larkin, managing director, Stifel Nicolaus.

The method used to calculate railroad revenue adequacy has implications on rates. Thus, the STB's test of a new, streamlined process for rate cases is also important. The old method involved a process that amounted to a full trial, says the Stifel Nicolaus report. Under the streamlined process, shippers contesting rates are spared much of the expense that had been associated with hiring consultants, lawyers, and other advisors to argue their rate case before the STB.

When it comes to rates, captive shippers, those with access and dependence on one railroad, have expressed concerns that they pay a disproportionate amount of rate increases when compared with shippers who have transport alternatives available. The STB hired Christianson & Associates to evaluate how railroads are treating capitve shippers. Some groups have called for a return of some economic regulation of railroads to protect against such alleged abuses. If the Christianson & Associates study indicates railroads are engaging in discriminatory pricing, government intervention would likely be required. Whether that would lead to re-regulation of the railroads is still up for debate. The streamlined process for rate cases could help.

"It seems that sufficient regulatory focus has been brought to bear on the issue to ensure that railroad pricing will be allowed to appreciate at or above the rate of railroad cost inflation, once larger pricing adjustments to legacy contracts have been fully implemented," said Stifel Nicolaus.

In separate news, the US Supreme Court ruled unanimously that railroads may challenge state methods for determining the value of their property. The case before the court involved CSX Transportation and the state of Georgia. The state had changed the method it used to calculate the value of railroad property, which resulted in an increase in the company's tax bill of nearly 50%.

The railroad could not be prohibited from challenging the method the state used to determine the value of its property, according to the Court. A federal law bars states from discriminating against railroads by taxing their property more heavily than other commercial property.

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